THE APPLICATION OF WEIGHTING METHODS TO CONSTRUCT EQUITY PORTFOLIO: A CASE STUDY OF ISLAMIC STOCK IN INDONESIA

• Main Author: Prilitaningtyas, Arienka
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/74580
• Institution: Institut Teknologi Bandung

Saving money in a bank or keeping significant sums of cash on hand for an extended period may not be wise because inflation will reduce their worth. Stock is one of the investment products that may be considered to preserve value or gain benefit. Investing someone’s wealth in the stock market might be a great choice as it offers several advantages, including generating new sources of income and preventing wealth from losing value due to inflation. Investing in Stock provides benefits that will be generated from the increase in the stock price and the dividend. Indonesia Stock Exchange (IDX) historical data has shown a promising trend; in the last 22 years, Indeks Harga Saham Gabungan (IHSG), which is an index consisting of all publicly traded stocks, has shown a positive trend with the average monthly growth of the price is 3,47%. The interest in investing in the stock market is also growing. By early March 2023, Single Investor Identification (SID) has reached more than 4,5 million Accounts for investors investing in Stock and other securities. A similar trend is also found in the Islamic Stock Market, which increased about 37,31% in the last two years. However, the increase in these investors did not align with the rise in capital market literacy, as the number shows a declining trend. Investing in the stock market poses several risks that need to be borne by the investor once they put their wealth into the stock market. Therefore, investors need some strategy to reduce the risk of their investors while optimizing the return on their investment. Investors could construct a portfolio of stocks to diversify the risk and optimize the return. Practitioners and researchers offer several methods to build a portfolio available in the market. Some popular weighting methods are Market Capitalization Weighted Portfolio, Equally Weighted Portfolio, Low Volatility Portfolio, Fundamentally Weighted Portfolio, Global Minimum Variance Portfolio (GMV), Tangency Portfolio, and The Predictive Blend. This research aims to answer the question of the best-performing portfolio weighting method Islamic retail investors could use to construct their portfolio consisting only of Islamic Stock. The Investment universe that is used in this paper is the Jakarta Islamic Index with the list of constituents from June 2014 to June 2022, with the historical data that is used to construct the portfolio five years before the publish date of the list of constituents. The method used in this study is a descriptive statistic of the out-of-sample performance of each portfolio constructed. To find which portfolio weighting method is the best, the author compared the performance of each portfolio and the best-performing portfolio to the market performance, which in this study are four benchmark indexes (IHSG, LQ45, ISSI, and JII). Several findings could be taken from this research. The Historical data show that investing in Islamic Stock Market following the Islamic Benchmark Indexes (ISSI and JII) could not give the investor better return and risk-adjusted return than its conventional counterparts (IHSG and LQ45). By constructing a portfolio, the investor is given a chance to get a return to get return that has historically proven to be better than all benchmark indexes and a better risk-adjusted return compared to LQ45, ISSI, and JII. Among all the portfolio weighting methods observed in this research, the Fundamental Weighting method developed by Arnott et al. (2005) gives the most superior performance compared to other weighting methods. This result is similar to the findings of Faturohman & Christian (2023), who found that Fundamental weighting methods give the best return when constructing a portfolio using LQ45 as the Investment Universe. This research provides evidence for Islamic retail investors to choose the portfolio weighting method to construct their portfolio using Islamic Stock in Indonesia. To the best of the author’s knowledge, this is the first paper that evaluates seven different portfolio weighting methods using Islamic Stock as a sample of observation.